2021 Litigation Forecast - Climate change litigation: New risks for companies and directors

In our last forecast, we noted widespread acceptance of the existence of anthropogenic climate change and the possible legal consequences as a defining issue of our time. We reported that climate change litigation against private companies had arrived in New Zealand with the commencement of High Court proceedings by a climate change activist, Mike Smith, against Fonterra and six other companies.

A year on, the Smith case continues with the defendant companies being successful in striking out two of Mr Smith’s three claims in the High Court. The claims in public nuisance and negligence were struck out but a claim based on a supposed new tort asserting that there is a legal duty not to contribute to dangerous interference in the climate system was not. As we expected, this
decision was appealed in every respect. The appeal is to be heard by the Court of Appeal in early 2021.

This article looks at the High Court’s decision in the Smith case. We also look at climate change related litigation in Australia, which has taken a different approach, and consider the possibility of similar claims in New Zealand.

The High Court decision in Smith

In summary, the High Court made the following rulings:

  • The claim in private nuisance was struck out for two reasons: Mr Smith lacked standing (because he could not prove special damage to his particular interests) and he was unable to prove an essential factual assertion that the defendants’ actions caused him loss. The Court determined that he “cannot responsibly assert that any one of the defendants, or even all of them, has materially contributed to climate change” because their contributions were impossible to determine or measure
  • The claim in negligence was also struck out. The primary reasons for this were that the damage Mr Smith claimed to have suffered was not a reasonably foreseeable consequence of the defendants’ actions and that the parties’ relationship was not sufficiently proximate for a duty to arise. The Court was heavily influenced by the existence of a detailed legislative regime to address climate change and the concern that the pleaded claims would cut across it.
  • The claim in a proposed new tort, asserting a duty not to contribute to dangerous interference in the climate system, was not struck out. The Court declined to do so primarily because, as a proposed new tort, its novelty meant that it ought to be properly considered at trial where all the relevant facts could be determined.

Australian claims

Australia is yet to see a ‘Smith’ type of case, where an individual claims to have suffered particular harm as a result of a defendant’s emissions. Instead, Australian climate change litigation has primarily arisen in cases in which investors contend that there has been inadequate disclosure of the effect of climate change on their investments.

Australia is yet to see a ‘Smith’ type of case, where an individual claims to have suffered particular harm as a result of a defendant’s emissions.

Summary of recent Australian cases

O’Donnell v Commonwealth of Australia

In July 2020, Ms O’Donnell filed a claim in the Federal Court of Australia alleging that Australian investors trading in Government bonds would face “material risks” because of the Australian Government’s response to climate change and this was not disclosed to investors. In particular, she alleged that, by failing to disclose climate change risks to investors like her, the Commonwealth of Australia breached its duty of disclosure and was misleading and deceiving investors. The case is still making its way through the Courts, with no decision released yet.

McVeigh v Retail Employees Superannuation Trust

Another claim concerning the failure of disclosing climate change risk was brought against the Retail Employees Superannuation Trust (REST), one of Australia’s largest asset owners. The claimant alleged that REST’s failure to disclose climate-related risk and its plans to address it breached legislation governing superannuation funds and corporations. The claim was settled at the eleventh hour before the hearing, with REST releasing a media statement agreeing to take further active steps to consider, measure and manage financial risks posed by climate change.

Abrahams v Commonwealth Bank of Australia

Shareholders of the Commonwealth Bank of Australia (CBA) alleged that it violated the Australian Corporations Act 2001 by failing to disclose climate change related business risks in its 2016 annual report. The claim was withdrawn when CBA included a summary of climate change related business risks in its 2017 report.

Outlook for New Zealand

Are the same types of claims coming to New Zealand?

We think that New Zealand companies should be prepared for similar claims. We see no reason in principle why they could not be brought here, although specific disclosure obligations will differ in various circumstances. The Council of Financial Regulators, a forum for agencies with responsibility for financial regulation, has included climate change and the facilitation of a smooth transition to a low-carbon and climate-resilient economy as one of its priorities.

We think that New Zealand companies should be prepared for climate change related claims.

How could these types of claims be made against New Zealand companies and directors?

Directors duties and claims under the Companies Act 1993

As noted in our last forecast, where directors fail to consider and respond to climate change risks that cause harm to a company, they could face claims that they breached reporting obligations and duties of care, including those arising from the risk of regulation, penalties and brand damage to the company, among others. These appear to be the primary risks arising from potential climate change claims and the Abrahams case serves to highlight these risks for New Zealand directors.

Misleading and deceptive conduct claims

Both the Financial Markets Conduct Act 2013 and the Fair Trading Act 1986 may offer avenues for investors and consumers to hold financial service providers and other persons in trade to account. Like O’Donnell, failure to disclose climate change risks to investors and consumers may result in a claim for misleading and deceptive conduct in New Zealand.

Trust-related claims

As in McVeigh, New Zealand investment and superannuation trust schemes may be exposed to potential litigation under the Trusts Act 2019. Under sections 29 and 30 of that Act, trustees owe a general duty of care and a duty to invest trust property prudently. A failure to account for climate-related risks may give rise to a claim by a beneficiary for failure to exercise reasonable care and skill in the administration of the trust.

On the horizon

A proposed new climate-related financial disclosure regime announced in September 2020 may soon provide a further avenue for enforcement. Under the proposed regime, entities within its scope will be required to make annual disclosures covering governance arrangements, risk management and strategies for mitigating any climate change impacts. Failure to comply with these reporting obligations may expose entities to enforcement action by the Financial Markets Authority.

Where to from here?

We see multiple avenues for climate change litigation in New Zealand in 2021 and beyond. While the civil tort claims made in the Smith case may not survive the appeal, the Australian examples show that there are other avenues that will continue to pose risks.

Read the full forecast

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